Most people spend it. They either pay down bills or buy some toy they've been wanting. As you can imagine, I'm going to recommend a different strategy.
Remember, you are always balancing multiple paths to financial success. That means you can't use it all to pay off credit card debt or make extra car payments. You also can't spend it all on clothes or toys.
Remember, habits rule your life. Too many people have no money because they chronically over-spend and then use the occasional "bonus money" to dig themselves out. That is a very clear pattern with many people. If it's you, Stop It! You can plan right now for what you're going to do with the next lump of cash that shows up in your life.
I recommend that you spend no more than 10% of it. That might be a small number. After all, if your tax return gets you only $100, then you get to spend only $10. Yup. Sorry. It's a new day. Today's the day you look to your future and spending that money (plus growth) when you retire.
Next, I encourage you to only use about 30% of the bonus cash to pay down debts. Some financial advisers will tell you that it's wiser to pay of debt costing you 25% per year than to invest and hope to gain 8% on your money. That's logical. And if you were rigorous and disciplined with your money, I'd be tempted to go along. BUT if you were disciplined with your money, you wouldn't have that debt - you'd be living within your means already.
- Spend within your income.
- "Need" less and save more.
- Put money into investments.
- Pay down debts.
- Don't take money out of investments once it's in.
If you throw all this money into paying down debts, you will not build the habits of spending less and paying down debts. Those "muscles of success" need to be exercised. In addition to tackling your habits from different streams at the same time, you're also making progress on three different goals: Enjoy your money (spend some), pay off some debt, and save your money.
Note that the decision to only use a small portion of your bonus money to pay off debt also highlights the need to have a whole program dedicated to tackling that debt. We'll address that in a future blog post.
That will leave you with about 60% of your bonus money going straight to investments. Wouldn't it be great if you had two or three of these this year? How much did you waste last year on bonus money that just got spent? $1,000? $2,500? More? Well now you can plan to have that much extra in savings!
Remember: Every dollar you don't spend today is potentially three dollars you get to spend in retirement.
Also remember: If you spend 100% of your bonus money on a new toy, that's just one old memory of an old toy you don't use any more in retirement. :-)
Summary use of bonus money:
10% splurge spending
30% pay down credit cards and other debt
60% saving and investing
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Quote of the Day:
“Annual income twenty pounds, annual expenditure nineteen six, result happiness.
Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.”
-- Charles Dickens, David Copperfield
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Checkup time: Have you set up an investment account? How about an Automatic Investment Transfer to your investment account? If you haven't done that, do it now. No one will do this for you.
Everyone reading this can put something extra into savings right now. $5, $10, $100. Something.
Every dollar counts.
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For earlier posts in this series, just search for the label "Y$10K" in the cloud tag on the right.
Or click here: http://blog.smallbizthoughts.com/search/label/Y%2410K.
Let me know how you're doing!